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Policies to Help Stabilize Rising Drug Costs

In the last blog I reviewed drug pricing terminology between the wholesaler and pharmacies. In this blog I will review how this process can lead to increasing drug costs. I will also two discuss public policies that have been implemented to try to stabilize that trend.

As mentioned previously, pharmacies are reimbursed at a discounted Average Wholesale Price (AWP). Pharmacies can seek deals with wholesalers to buy drugs at the Wholesale Acquisition Cost, WAC, or Average Manufacturer Price, AMP. Pharmacies will then make a profit by selling at around AWP. In other words, a pharmacy’s profit can be represented as AWP minus either WAC or AMP. Pharmacies can increase their profits by selling drugs with higher AWPs. Knowing this, manufacturers may attempt to set a higher AWP.  Since pharmacies are drawn to higher AWPs and purchase from wholesalers, wholesalers will carry the highest AWP drugs they can to satisfy the pharmacies they sell to. This relationship is similar to that of the manufacturer and the wholesaler. The manufacturer will create the highest AWP possible to attract the wholesalers who are going to buy at lower price like AMP anyway. Because wholesalers do not purchase drugs at AWP, and instead purchase drugs at a lower price, an increase in the AWP will not cause them to search for other manufacturers. This means that manufacturers can increase AWP while simultaneously satisfying the needs of pharmacies, making their product more attractive to wholesalers without losing business to competing manufacturers. AWP has a natural tendency then to increase because pharmacies want it higher and manufacturers can increase it without the risk of losing business from wholesalers.

Increasing AWP does increase costs to insurers and taxpayers. Since the government does serve as an insurer, it has put policies in place to prevent increases in AWP from bankrupting them. The federal government does this by imposing a Federal Upper Limit, FUL. This limit is the maximum price at which Medicaid will reimburse a pharmacy for a drug. In order for a drug to qualify for an FUL price, it must have at least three equivalent products made by three different manufacturers. To put is simply, if “Drug X” had an FUL price, it must have three different therapeutically equivalent generics that are made by at least three competing manufacturers. The FUL prices is set at 150% of the cost for the cheapest equivalent drug. If “Drug X” is made by manufacturers 1, 2 and 3, and the cheapest price is from manufacturer 1 at $100 dollars, then “Drug X”’s FUL price is $150. These strict qualifications means that some drug do not have an FUL price and of those that do, paying 150% for the cheapest generic may not produce any savings. In order to make up for these limitations, some states have created Maximum Allowable Costs or MAC (more information available here). MAC was designed to operate as a continuation of FUL to further increase savings but at a state level. MAC prices are uniquely set by each state and do not have strict rules for establishing what drugs qualify for MAC and what the price ceiling should be. This has created variation between states with some states achieving more drugs that qualify and more aggressive price ceilings than others. Whether or not these MACs were worth the resources put into their creation is something that remains to be seen.

In conclusion, both state and the federal government have created policies to the curb the natural tendency for AWP to rise. The federal government first created the Federal Upper Limit, or FUL, and states later created Maximum Allowable Costs, or MAC based up the FUL. The FUL has severe limitations in the form of drug qualifications that are too strict and a 150% price ceiling that can be ineffective. The MAC on the other hand may be a step in the right direction. Since the MAC is based off of and shares similar limitations to the FUL, its effectiveness remains to be seen. Moreover, while FUL and MAC may be effective in some situations, they alone are not enough to prevent increasing drug costs.

Robert Bond, PharmD '18



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